Systematic monetary policy in a SVAR for Australia

Sign restrictions on the coefficients in the structural equation for the policy interest rate and a normalization requirement identify this equation as the monetary policy equation and its shock as the monetary policy shock in a partial SVAR for conventional monetary policy in Australia. We use a recently developed sign restrictions algorithm and extend it to account for estimation uncertainty in the reduced-form VAR. Many of the accepted responses display puzzles. The maximum and minimum target responses are obtained as each corresponds to a single monetary policy equation. Both show that prices and output fall, and the unemployment rate rises, following a contractionary monetary policy shock. The minimum target response shows a slight exchange rate puzzle. These results are compared to those from a traditional sign restrictions algorithm and with other studies. The target responses imply plausible ranges for the coefficients in the monetary policy equation.